Typical saver is LOSING almost 9% of their cash in real terms as returns hit 46-year low: Why inflation is harming your finances and what to do about it

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  • Real savings income fell to its lowest level since February 1976.
  • In September, depositors actually lost 8.9% of their bank due to inflation.
  • And this despite the fact that the savings rate was the highest in the last few years.
  • The typical family saved just £17 a week between July and September.
  • This represents a year-on-year drop of 74% compared to the same period last year.

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Savings returns in real terms fell to their lowest level since February 1976, and inflation ate almost 9% of a typical rainy day fund last month.

According to a study by mutual Scottish Friendly and think tank Center for Economic and Business Research (Cebr), real annual savings returns fell to -9% in July.

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The slight increase in the average savings rate meant a smaller annual decline in August and September, but in real terms it was still -8.8% and -8.9%, respectively.

The Silent Killer: While interest rates on savings accounts may give the impression that your account is increasing in value, inflation can cause your savings to depreciate in “real terms.”

CPI inflation rose again to 10.1% in the 12 months to September, up slightly from 9.9% in August.

This means that consumer prices have risen more than five times compared to the Bank of England’s long-term target of 2%.

Meanwhile, according to Moneyfacts, the average easy-access savings rate was just 0.85% in early September.

A study by Scottish Friendly and CEBR calculated that the average British household saved just £17 a week between July and September as inflation remained high.

This represents a 74 per cent year-on-year drop, with the average family thought to have saved £66 a week over the same period last year.

To offset the impact of inflation, households will have to earn an extra £59 a week before taxes or spend £49 less a week to be able to save at the same level as last year.

An estimate of the average British household's weekly savings from 2018 to present.

An estimate of the average British household’s weekly savings from 2018 to present.

How much has inflation eroded savings?

According to the historical inflation calculator This is Money, which uses a long-standing inflation index rather than the consumer price index, inflation has risen 795 percent from 1976 to the present.

The calculator tells us that someone who had £100 in 1976 would need £894 today to have the same purchasing power.

CEBR and the Scottish Friendly Study modeled estimates of the average monthly interest rate on instant savings using data from the Bank of England to compare how typical savings deposits have grown over time.

It was determined that a £100 deposit in 1976 would be worth £1,067 today in nominal terms. This corresponds to an increase of almost 970 percent.

However, adjusted for inflation, the real return on savings between 1976 and today falls to just 67.3%. In total, this adds up to just £167.30.

This would mean that the average easy-to-reach saver with monthly interest would benefit from a real term rate of about 0.35% over that time, adjusted for inflation.

Easy Access Earnings: This graph shows the real annualized returns of instant access accounts from 1966 to 2022.

Easy Access Earnings: This graph shows the real annualized returns of instant access accounts from 1966 to 2022.

For more than a year, the rate paid on savings has remained below the CPI, meaning savers are effectively losing money in “real” terms.

Currently, there is not a single savings product on the market that even comes close to the 10.1% inflation rate.

While savings rates have risen substantially in recent months, the best savings deals continue to fall short. The best rate for easy access is 2.81% and the best flat rate is 5.1%.

Kevin Brown, savings specialist at Scottish Friendly, said: “The combined effect of rising inflation, stagnant wage growth and low interest rates means that savers have been in an incredibly difficult position over the past year.

“These conditions created the perfect storm for savers, causing real yields to drop to a 46-year low.”

While real yields remain low, savings rates are expected to gradually improve after the announcement of the energy price guarantee, even though the government’s bill-capping scheme is now being scaled down.

The energy price guarantee prevented Ofgem’s energy cap from rising to £3,549 for the average household on 1 October and capped the rise to £2,500 for the average household.

It was originally put in place for the next two years, but the new chancellor, Jeremy Hunt, cut it down to April the following year.

Prior to the initial announcement of the policy, the amount of money households had available to save as a percentage of their disposable income was projected to plummet over the next 12 months to a low of 1.9 percent.

But Scottish Friendly and CEBR are now projecting that ratio will rise to 6.9% in 2023 as some of the forgone household spending on electricity bills is expected to be saved – at least until next April.

CPI inflation is now at 10.1%, which means consumer prices are rising more than five times the Bank of England's long-term target of 2%.

CPI inflation is now at 10.1%, which means consumer prices are rising more than five times the Bank of England’s long-term target of 2%.

Brown adds: “While the situation remains dire, the outlook has improved slightly after the government took action to help people cope with rising electricity bills, which should limit the previously projected peak in inflation.

“As interest rates continue to rise, households should be encouraged to save, but it is important to think about how best to protect their…

Credit: www.thisismoney.co.uk /

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